US confidence falters, China buoyed by Reuters

A look at the day ahead in US and global markets from Mike Dolan

An unexpected drop in U.S. household confidence this month and growing anxiety about jobs again fueled aggressive rate cut bets — dragging Treasury yields, the dollar and stock futures lower by Wednesday’s open.

Fueled mostly by employment signals from Tuesday’s consumer survey, futures now offer an 80% chance the Federal Reserve will cut policy rates by another 50 basis points at its next meeting – just days after the November election.

After a decent new paper auction last night, two-year Treasury yields are at a 3.5% move for the first time in two years. A “tilting” of the 2-10 year yield curve – which sees two-year yields fall more than the decline in 10-year yields – pushed the new positive spread above 20bp for the first time since June 2022.

The constellation hit , which is now a hair’s breadth from its lowest level of the year, and the surprising disruption in the growth picture sent U.S. stock futures off record highs before the bell on Wednesday.

The cat among the pigeons came from the Conference Board’s latest consumer survey, which revealed the biggest drop in confidence in three years in September amid growing fears about the job market.

The share of households that consider jobs “abundant” fell to its lowest level since March 2021. The survey’s so-called labor market gap, derived from data on respondents’ views on whether jobs are plentiful or hard to find obtained, decreased to 12.6 – the narrowest. in 3-1/2 years.

And the rush to cut interest rates has picked up pace around the world, with China following Tuesday’s blitz of monetary easing of mortgage rate cuts and stimulus to buy stocks, with a sharp 30bp cut in its term loan rate environment.

Chinese shares and the yuan added to Tuesday’s gains, with the latter hitting another 16-month high on fresh hopes that authorities may finally be ready to stimulate the faltering economy.

While Beijing’s latest moves are getting the benefit of the doubt so far, most overseas investors believe that credit easing will only have a chance of reversing the demand picture and property slump if it is combined with more serious fiscal measures on the housing situation. A necessary but still not sufficient move in the parlance of economic news.

While the yuan’s rally on deep interest rate cuts seems odd, it appears to be moving further away from growth hopes and stock market stimulus. Chinese government bond yields also rose.

But the real estate market is not China’s only concern.

Beijing on Wednesday called on the United States to stop “unreasonable suppression” of its companies in response to US proposals to ban Chinese software and hardware in vehicles on its roads over national security concerns.

Few places would welcome a recovery in Chinese demand more than Europe, where September surveys this week in Germany and across the bloc revealed an alarming slump in business and manufacturing into contractionary territory.

So much so that money market bets are putting the odds of a third European Central Bank interest rate cut of the year as soon as next month above 50% for the first time. With the euro flirting with a year high of $1.12 to a declining dollar, there is growing room to cut again.

In addition, an ECB study on Wednesday said wage pressures are easing in the euro zone, largely driven by lower additional compensation paid on top of negotiated wages and likely contributing to further moderation in inflation.

Sweden’s central bank is not standing still, with the Riksbank cutting its key policy rate another quarter of a point to 3.25% on Wednesday – its third of the year – adding that if the inflation outlook remains favorable, it may ease politics at a faster pace in the months ahead.

Despite the Reserve Bank of Australia holding the line this week, news that headline inflation in Australia slipped back into the central bank’s target zone last month will be encouraging there too.

Meanwhile, the Swiss National Bank is set to cut again on Thursday.

On the other hand, Bank of England hawk Megan Greene’s latest polls continued to suggest the BoE would be in no rush to ease further. And sterling continues to rise.

Elsewhere, the latest US election poll continues to show a close race, although the latest Reuters/IPSOS polling showed a widening gap in favor of Democrat Kamala Harris – with about 47% support to 40% for rival Donald Trump.

In European company news, SAP shares fell 3.6 percent after a report said the German software developer was being investigated in the United States for alleged price-fixing.

Key developments that should provide more direction for US markets later on Wednesday:

* US August New Home Sales

* Federal Reserve Board Governor Adriana Kugler speaks

* US Corporate Earnings: Costco (NASDAQ: ), Micron Technology (NASDAQ: )

* US Treasury Sells $70B 5-Year Notes, Auction 2-Year Floating Rate Notes

* United Nations General Assembly in New York

(By Mike Dolan; Editing by Toby Chopra; [email protected])